GLOBAL MARKETS-Wall Street rallies on GDP data; euro firm after EU downgrade

Reuters - UK Focus

* S&P, Dow hit record highs, Nasdaq highest since 2000

* Euro rebounds in wake of S&P's cut of EU's AAA rating

* U.S. yield spreads shrink as Fed's taper changes rate view

* Gold rises but set for biggest annual loss in 32 years

By Richard Leong

NEW YORK, Dec 20 (Reuters) - U.S. stocks jumped on Fridayafter the U.S. government said the economy grew at its briskestpace in nearly two years, while the euro held steady, paringearly losses after Standard & Poor's stripped the European Unionof its triple-A credit rating.

Gold rebounded from a six-month low, but was on track forits biggest annual loss in more than three decades, as investorsdumped the precious metal after the U.S. Federal Reserve decidedto reduce its bond purchases.

The Fed's decision on Wednesday to begin tapering its$85-billion monthly bond purchases in January has hurtmedium-dated U.S. government debt but supported longer-datedU.S. government debt.

Since then, the yield gap between medium- and long-datedTreasuries contracted to its tightest level in more than threemonths, signaling that some traders reckon the Fed might raiseinterest rate sooner than they had expected and the taperingwould reduce the risk of a long-term inflation surge when U.S.growth accelerates.

The Commerce Department reported that the U.S. economy grewat a 4.1 percent annual rate in the third quarter, a sharpupward revision from the prior growth estimate of 3.6 percent. The data made investors more optimistic aboutthe prospects for corporate profit growth and about owningstocks and other risky assets for 2014.

"The global economy is showing signs of improvement. We areseeing that in the U.S. with the GDP data today," said TerrySandven, chief investment strategist at U.S. Bank WealthManagement in Minneapolis, which oversees $113 billion.

The S&P 500 index and the Dow Jones Industrial averageposted record highs, while the Nasdaq composite advanced to itshighest since 2000. The FTSEurofirst 300 index of topEuropean shares booked its biggest rise in eight months.

Investors appeared more comfortable with the Fed's modestcut in stimulus as the U.S. central bank had signaled interestrates were likely to stay low for longer.

"Despite the cut, the Fed is still injecting $75 billion amonth in liquidity, which will continue to support equitiesgoing forward," said David Thebault, head of quantitative salestrading at Global Equities in Paris.

MSCI (NYSE: MSCI - news) 's all-country world equity index rose0.4 percent to 400.40, 3 points below its year high.

On Wall Street, the Dow Jones industrial average ended up 42.06 points, or 0.26 percent, at 16,221.14. TheStandard & Poor's 500 Index closed up 8.71 points, or0.48 percent, at 1,818.31. The Nasdaq Composite Index finished up 46.61 points, or 1.15 percent, at 4,104.74.

Europe's broad FTSEurofirst 300 index closed 0.45percent higher at 1,287.61, bringing its weekly gain to 3.6percent, its biggest since late April (Frankfurt: B2B.F - news) .

Earlier, Toyko's Nikkei index closed up 0.07percent, bringing its weekly gain to 3.03 percent.

In contrast to the run-up in stocks, most commodity pricesmelted down following the Fed's tapering decision, though theyshowed signs of stabilizing.

Gold rebounded after hitting a six-month low. It was still on course for its largest annual loss in 32 years. Gold was last up 1 percent at $1,201.54 an ounce, shaving itsweekly decline to 2.93 percent but still on track to lose 28percent on the year.

The oil market has held up against the broader pessimism oncommodities.

Brent crude oil rose $1.48 or 1.5 percent to settleat $111.77 a barrel for a 2.7 percent gain on the week, boostedby a positive outlook for fuel demand in the United States andreduced Libyan supply. U.S. oil futures settled up 28cents or 0.28 percent at $99.32, which was up 2.6 percent on theweek.

In the currency market, the euro was up 0.1 percentagainst the dollar at $1.3671 after hitting an early low of$1.3626. The single currency fell 0.5 percent versus thegreenback on the week.

Standard & Poor's on Friday cut its supranational long-termrating on the European Union to AA-plus from AAA, citing risingtensions on budget negotiations and following cuts to theratings of member states in recent months.

Rival rating agency Fitch later affirmed France's AA-plusrating.

The dollar weakened against the Japanese yen on lowerU.S. bond yields. It was last down 0.2 percent at 104.03 yenafter touching a five-year high against the Japanese currencyearlier on the upbeat U.S. growth data.

The yield on the benchmark 10-year Treasuries note fell 4 basis points to 2.89 percent after flirtingwith its year high of 3 percent earlier.

The spread between five-year and 30-year Treasuries, whichsome analysts see as a gauge of investors' view on changes inthe Fed's interest rate policy and its bond purchase program,shrank to 2.15 percent, its tightest level since mid-September.

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